INSIDER TRADING & REGULATION AND RACTICES IN INDIA

Group members : Arshi shaikh Priya dege Mamta gohil Piyus borrade Suchit mandlik

Introduction
Insider trading essentially denotes dealing in a company s securities on the basis of confidential information relating to the company which is not published or not known to the public used to make profit or loss.

REGULATORY MECHANISM IN INDIA: HISTORICAL BACKDROP

The security market in India developed through the establishment of the Bombay Stock Exchange was way back in 1875. In 1979, the Sachar committees report In 1989 the Abid Hussain Committee also recommended that the insider trading activities may be penalized SEBI (Insider Trading) Regulations 1992 prohibited this mal practice.

Who is Insider???
Insider is the person who is connected with the company , who could have the Unpublished price sensitive information or receive the information from somebody in the company .

Who are insider traders?

Corporate officers, directors , and employees Friends , business associates, family members, and other types of such officers , directors , and employees. Employees of law, banking , brokerage and printing firms Govt employees Other persons

What is insider trading?

The illegal kind of Insider Trading is the trading in a security (buying or selling a stock) based on material information that is not available to the general public. It is prohibited by the US Securities and Exchange Commission (SEC) because it is unfair and would destroy the securities markets by destroying investor confidence.

Liability for insider trading

Liability for inside trading violations cannot be avoided by passing on the information in an arrangement, as long as the person receiving the information knew or should have known that the information was company property.

CONSIDERS BOTH
LEGAL: Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options. These trades are made public through Securities and Exchanges Commission fillings. ILLEGAL: Is the buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Insider trading in India

Regulatory aspects of prohibition of Insider Trading

SEBI prohibition of Insider Trading regulation 1995.
Section 11(2) E of companies act 1956 prohibits the Insider Trading What is Insider Trading is not defined in the companies act 1956

Regulation 3 of the Prohibition of Insider trading

No Insider should deal insecurity , while in possession of UPPI.

He / She should not communicate or procure the UPPSI to others.

Regulation 3(B)
This regulation states that there should be Chinese Wall With in the company & one department should not know about what other departments are doing.

Investigation of Insider Trading

Regulation 4(a) deals with the request for the enquiries. SEBI can also appoint the outsider auditor for the enquiry & auditor would have the same power as the SEBI possess. Before undertaking any investigation under regulation (5) SEBI shall give a reasonable notice to insider for that purpose.

Where SEBI is satisfied that in the interest of investors or in public interest no such notice should be given, it may by an order in writing direct that the investigation be taken up without such notice.

SEBIs Power to make inquiries and inspection

Regulation 4A If the SEBI suspects that any person has violated any provision of these regulations, it may make inquiries with such persons. The SEBI may appoint officers to inspect the books and records of insider(s) for the purpose of inspection. The SEBI can investigate and inspect the books of account, either records and documents of an insider on prima facie. SEBI can investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading.

Duties/ Obligations Of the company

Every listed company has the following obligations under the SEBI(Prohibition of Insider Trading)Regulations , 1992 To appoint a senior level employee generally the Company Scecretary , as the Compliance Officers;

To set up an appropriate mechanism and to frame and enforce a code of conduct for internal procedures,
To abide by the Code of Corporate Disclosure practices as specified in Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992

Conti..
To initiate the information received under the initial and continual disclosures to the Stock Exchange within 5 days of their receipts To specify the close period

To identify the Price Sensitive Information

To ensure adequate data security of confidential information stored on the computer; To prescribe the procedure for the pre- clearance of trade and entrusted the Compliance Officers with the responsibility of strict adherence of the same

Penalties
Following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading)Regulations , 1992 SEBI may impose a penalty of not Rs 25 Crores or three times the amount of profit made out of insider trading; whichever is higher SEBI may initiate criminal prosecution SEBI may issue orders declaring transactions in securities based on unpublished price sensitive information SEBI may issue orders prohibiting an insider or refraining an insider from dealing in the securities of the company

Stop Trading on Congressional Knowledge Act (STOCK, Act)

In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK Act" was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or "Political Intelligence" firms that research government activities.

Manage This Issue

Police your insiders yourself. Don't allow insider trading. Don't engage in it yourself.
Don't share material information with anyone who is not an insider. Make sure all insiders understand the responsibility this places on them. Make sure everyone in the company understands the circumstances under which they might become "temporary insiders' and how they must treat that situation.

NEED FOR PREVENTING INSIDER TRADING

PROTECT PROFESSIONAL TRADERS CODE OF BUSINESS PRINCIPLES

SHARE DEALING CODE

Why there is need for the Prohibition of Insider Trading???

As per SEBI the Prohibition of Insider Trading is required to make Securities Market: Fair & Transparent To have a level playing field for all the participants in the market For free flow of information & avoid information asymmetry

What is price sensitive information???

It means any information which relates directly or indirectly with the company & which if published is likely to materially affect the prices of the securitys of the company.

The information which is deemed to be price sensitive are like.

Periodical financial results Intended declaration of the dividends(both Interim & Final) Issue of securities or buy back of securities Any major expansion plans or execution of new projects. Amalgamation & mergers or takeovers. Disposal of the whole or substantial part of the undertaking Any significant changes in policies , plans or operations of the company.

Disclosures for prohibition of Insider Trading

Initial Disclosure Continuous Disclosure

Model Code of Conduct for Prohibition

A compliance officer is required to be appointed by the company. There should be pre-clearance of trade by the officer of designated employees. Trading window ,is closed 7 days prior & 24 hours post event for the connected persons during the UPPSI activities like RESULTS,IPO,CAPEX,BUY BACK , etc. There are several forms in accordance with disclosures & code of conduct.

LEGAL V/S ILLEGAL

LEGAL Legal insider trading occurs between people within a company Transactions are not a secret from anyone. Company`s stock price is not affected Public have access to all the insider information ILLEGAL Illegal insider trading is between people who have information that the outside public does not have Transactions are kept secret Reason for company`s stock price to go down Employees have lot have insider information that public do not have

Case Study HLL-BBLIL MERGER

HLLBROOKBOND LIPTON INDIA LTD

Focus on legal controversy involving BBLILs merger with HLL. SEBI, suspecting insider trading, conducted enquiries. In August 1997, SEBI charged HLL of insider trading by using Unpublished Price-Sensitive Information.

HLL-BLIL Vs SEBI
HLL bought 8 lakh shares of BBLIL from UTI at Rs 350.35 per share (At a premium of 9.5% of the ruling market price of Rs 320) just two weeks before the formal announcement knowing that the HLL and BBLIL were going to merge. SEBI held that HLL was using unpublished, price-sensitive information to trade, and was therefore guilty of insider trading. In March 1998, SEBI passes an executive order, which sent shock waves through the countrys corporate sector. SEBI directed HLL to pay UTI Rs 3.4 Crore in compensation, and also initiated criminal proceedings against the five directors of HLL and BBLIL.

How to analyze insider trading reports

Buy or sell Size Matters How many Timing

Insider Trading Isn't Always Illegal

There is an important thing to emphasize here: Insiders don't always have their hands tied. Insiders legally buy and sell stock in their own company all of the time; their trading is restricted and illegal only at certain times and under certain conditions.

CONCLUSION